Flexsteel Stock: + 19% Sales But Weak Quarter, 7x P / E And 56% Upside (FLXS)

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Flexsteel (FLXS) is one of the largest manufacturers, importers, and online marketers of furniture products in the US. The company has a P / E of 6.9x and an FCF yield of 11.5% on FY06 / 2023. Flexsteel has some near-term supply issues [as is also impacting large parts of the USA economy], as discussed in the Q2 results section, but these are only temporary and should reduce in intensity as the year progresses. We are confident that Flexsteel will start to rebound and reach previous highs seen in June [stock is now -49% off of those highs] once these supply chain issues ease. The order backlog, as a result, is still very robust and the sooner the company can get back on its feet, the sooner they will be able to fulfill remaining orders. And we see this being met soon, in the latter half of this calendar year. With this, we think the company still has 56% potential upside at a price target of $ 39.30.

Q2 Results

Flexsteel released its second quarter earnings for the quarter ended December [fiscal year 06/2022]. There are no other analysts covering this stock, and the company reported a loss of – $ 1.13 per share. This is now the second quarter in a row of net losses. Despite headwinds coming in from the global supply chain issues, the company was able to maintain its sales guidance and net sales increased 18.9% YoY from the prior year first quarter. Nonetheless, even though second quarter sales guidance was met, the company’s supply chain issues will leave a dent on near-term profits.

Ocean container rates have continued to climb and may further continue to do so. While the company is trying its best to pass on these costs to consumers, there has been increased price sensitivity and a lag in price realization which is creating pressures on gross margins. Competition has also decided to follow through with price increases, and this has made it easier for Flexsteel to increase its prices in suit. There have also been pressures from ancillary charges, with there being a lack of truck drivers and warehouse workers to aid with shipping containers pick-up and drop-off. However, C-level management has promised to deliver sequential improvements in these areas as the fiscal year progresses.

The backlog for this company continues to grow and is at robust levels. At $ 121 million this home furnishings quarterly backlog is up 20.4% YoY from the prior year quarter. Furthermore, it is almost close to this December quarter’s entire net sales of $ 141.7 million. Flexsteel is still working hard to fulfill these orders, and increase its sales, and that continues to take precedent. The newly opened manufacturing plant in Juarez, Mexico, started operations in July and is ramping up as expected. They are constructing a new facility in Mexicali, Mexico, and it is still on target to be completed by June and will start production in August.

Flexsteel has minimal seasonality, unlike other furniture companies that we are following like Bassett (BSET) and Hooker Furnishings (HOFT).

Price Target and Valuation

Although the stock has cratered since June of this year, we still believe that at this time the company represents a good buying opportunity. With the company at its lows, we still see upside potential in the cards. The company is trading at -49% off of the company’s highs seen in June 2021 at ~ $ 50.00.

At today’s price of $ 25.14, on FY06 / 2023 estimates, we have a P / E of 7.0x (ex-cash P / E of 5.82x) and an FCF yield of 8.5% (FCF yield on EV of 10.2%). Flexsteel should recover as it is currently at an inflation point, with rebounding earnings, on the back of a strong furniture market.

To arrive at our price target of $ 37.50, we used a P / E of 15.0x (13.1x ex-cash P / E) for the FY06 / 2022 based on our estimates. For the FY06 / 2022, we also have an EPS estimate of $ 2.50. Multiplying both P / E of 15.0x to the EPS of $ 2.50, we were able to arrive at a price target of $ 37.50.

Industry Data

Increased number of individuals are still working-from-home. This is leading more people to continue buying houses so that this requirement is met, a trend that has started back in 03/2020 which has continued to manifest. Second, home prices continue to skyrocket characterized by increasing bidding wars and homes selling at well above their listed prices [as seen in image below].

Project Syndicate Chart

Project Syndicate

Inflation levels are leading buyers to purchase items of tangible value. They are buying homes as a hedge against inflation. Interest rates are an even bigger reason to get invested right now as they remain attractive in this buying environment.

Conclusion

Flexsteel had a soft quarter, with losses to attribute. However, the company had good net sales and ordered backlog growth to show for the quarter. Again, Flexsteel was plagued with supply chain disruptions but we truly believe that these are temporary in nature.

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